SEC Prevails in Another Trial

The Commission prevailed in another trial last week with a jury finding in its favor and against the defendant. This action centered on misrepresentations made by a borrower to a broker in connection with margin loans. SEC v. Hall, Civil Action No. 1:15-cv-23489 (S.D. Fla. Filed Sept. 17, 2015).

The complaint named as a defendant Christopher Hall, the COB of Call Now, Inc., a public company that owned and operated a race track. Mr. Hall and his firm had millions of dollars in margin loans from broker and clearing firm Penson Financial Services, Inc. prior to the market crisis.

By 2009 the collateral had significantly diminished in value. The Defendants were requested to post additional collateral. Mr. Hall offered shares of Call Now stock which the broker valued internally at $10 per share. He represented to the firm, however, that liens had to be cleared from the shares before they could be deposited as collateral. Pension then arranged to extend Mr. Hall $5.5 million in loans. In fact the claim was false, according to the complaint. Mr. Hall had the loan proceeds wired to an account in Florida he controlled and only used about $850,000 to pay for liens.

Mr. Hall also agreed to pledge his interest in a real estate limited partnership as additional collateral for his margin loans. As part of the arrangement Mr. Hall agreed to obtain the broker’s written consent if he decided to sell the interest. Since the interest had a pre-existing lien, according to Mr. Hall, Penson agreed to subordinate its interest to that of a prior lender. The broker did not know that the prior lender was Mr. Hall and that the lien had been created to shroud his assets from creditors.

Subsequently, defendant Hall sold his interest in the real estate limited partnership without informing the broker. He took the $1.3 million in proceeds and delivered $1 million to his firm and the remainder to his personal bank account. The complaint alleged violations of Exchange Act Section 10(b) and Securities Act Section 17(a). The case is in litigation. See Lit. Rel. No. 23352 (Sept. 17, 2015).